Imperial Oil still working out kinks at $12.9-billion Kearl oil sands mine

CALGARY — Imperial Oil Ltd. is struggling to work out the bugs at its $12.9-billion Kearl oil sands mine nearly one year after production began as the company seeks to bring the project to full capacity.

Chief executive Rich Kruger said Wednesday the company has been coping with manufacturing and installation-related defects on some of the more than 8,000 valves that regulate aspects of the project such as fluid flow and hydraulics.

Production at the massive bitumen mine averaged 70,000 barrels a day in the first-quarter this year, the company said. That’s up from an average 52,000 barrels per day in the fourth-quarter last year, but still below the mine’s 110,000-barrel capacity.

It’s like taking a high-performance sports car, cutting it in half, and then moving it a few miles down the road and trying to reassemble it

Kearl’s initial phase was plagued by cost overruns and delays in part because of work related to breaking down processing modules. A plan to ship the large units along U.S. highways to Alberta encountered a public backlash, forcing Imperial to reassemble them in smaller loads. Mr. Kruger said that work “certainly didn’t help” with Kearl’s production ramp-up, which has lagged market expectations.

“It’s like taking a high-performance sports car, cutting it in half, and then moving it a few miles down the road and trying to reassemble it,” he told reporters following the company’s webcast investor day in New York. He said the defects do not signal any long-term concerns with the project. “But if something doesn’t work you’ve got to replace it or repair it.”

Imperial said Wednesday it expects a smoother ramp-up at Kearl’s second phase, which is under construction. The expansion will add another 110,000 barrels a day of capacity to the mine, with start-up targeted for 2015.

Mr. Kruger said the added volume would also bring down operating costs, which rang in at $30 a barrel for the mine’s initial phase. Gains could also come from future de-bottlenecking initiatives, he said.

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Still, the operating costs were sharply above some analyst expectations of US$20 a barrel in the near-term. Greg Pardy at RBC Capital Markets said he now expects the mine’s operating costs to come in at between US$29 and US$32 a barrel, falling to $24 to $28 a barrel once the second phase starts up and to $19 to $23 at full capacity. Imperial estimates maintenance costs of between $5 and $10 a barrel.

By contrast, Suncor Energy Inc. is expecting operating costs for its $13.5-billion Fort Hills mine to ring it at $20 to $24 a barrel, with sustaining capital estimated at $3 a barrel.

Mr. Kruger said Kearl would save on maintenance costs by not having an upgrader, a tangle of vessels and pipes that convert molasses-like bitumen into lighter oil suitable for refineries.

ExxonMobil Corp. and Imperial developed the mine without one of the hugely expensive plants. The project’s three production trains instead harness technology called paraffinic froth treatment to churn out diluted bitumen that can be sent directly to market.

Some 22 refineries are currently testing the product, Mr. Kruger said. That includes “a couple” of cargoes dispatched to a refinery in Malaysia via Kinder Morgan Inc.’s Trans Mountain pipeline to Canada’s West Coast, putting Imperial among a group of companies testing Canadian oil on global markets.

Husky Energy Inc. and Cenovus Energy Inc. have also sent shipments of Canadian oil into the Asian market in recent months. All three companies are backing Kinder Morgan’s $5.4-billion expansion of the Pacific-bound pipeline, which is slated to begin regulatory hearings in January.

Mr. Kruger said crude from Kearl has been well-received in the market. “There’s a strong demand for this,” he said. “Refiners are not having operational issues with it.”

With Kearl’s second phase scheduled for completion in 2015, the Canadian energy giant is forecasting a sharp drop in annual capital spending. It said yearly spending would fall to between $3-billion to $4-billion after 2015, from about $5.5-billion this year.

The company also has several steam-driven oil sands developments on tap. Last year it filed plans for a $7-billion project called Aspen, which at full capacity would yield 135,000 barrels of bitumen a day. A targeted year-end startup of the company’s Nabiye project in Cold Lake, Alta., is “under pressure,” however, owing to harsh winter weather and productivity issues, Mr. Kruger said.

Separately, an Imperial executive said it would be “several years” before the company would be ready to make a decision on a proposed liquefied natural gas plant on Canada’s West Coast.